CFO Confidence Continues to Trend Lower

December 2023

Coming into the year, there was strong consensus that 2023 would be a year of recession. Interest rates skyrocketed in 2022 while financial markets plummeted. All of this seemed destined to be prologue to economic downturn. A Bloomberg economic forecast model pinned the chance of recession at 100%.

But 2023 has been filled with surprise. Rather than capitulate to higher borrowing costs, the year has been associated with strong economic performance. Various forms of construction spending have expanded. Growth in national output has been strong, especially by advanced world standards. Consumers continue to spend and employers continue to hire.

And yet, construction industry financial leaders have tended to grow increasingly pessimistic as the year has progressed. Is it because construction financial professionals are scrooges, or are there genuine reasons for concern?

During the fourth quarter of 2023, confidence contracted for a third consecutive quarter, with the Overall Confidence Index declining 3% to a reading of 96. The index is down nearly 7% from a year ago.

A deeper dive into the data reveals why. Only 17% of respondents are “not concerned at all” by demand for construction. Only 12% are “not concerned” by the availability of financing for projects. With several commercial real estate segments in disarray and project financing costs elevated in the context of tighter credit conditions, more CFOs and controllers appear concerned by the possibility of declining demand for their services. Indeed, fully 42% of respondents indicate that their backlog is lower than a year ago. More than three in four believe that backlog will either be the same or lower a year from now.

Despite growing concerns regarding demand, skills shortages overwhelmingly continue to be the leading concern for construction financial professionals. Those shortages are associated with rapid increases in industry wages. There is also a meaningful level of concern regarding materials prices, with four in five respondents indicating that materials prices will either be the same or worse a year from now.

These dynamics are squeezing profit margins. One in three respondents indicate that margins have been deteriorating. Another quarter indicate that they are stagnant. Fewer than one in four believe margins will have improved a year from now. Meanwhile, nearly 40% expect them to be worse.

This increasingly pervasive pessimism extends to the bulk of sub-indices. The Business Conditions Index declined a worrisome 15% (to 87) during the quarter and is 18% lower than a year ago. The Current Confidence Index (96) slumped nearly 8% and is down more than 9% on a year-ago basis. The implication is that activity has been slumping recently and will continue to do so over the very near term.

Oddly enough, the Financial Conditions Index improved on a quarterly basis after declining during earlier quarters. The index was up 5% from the prior quarter and 2% from a year ago. There is growing conviction that the Federal Reserve is done tightening monetary policy by driving the interest rates it directly controls higher. Several interest rates have been declining recently in anticipation of the initiation of Federal Reserve rate cuts to transpire at some point next year, perhaps as early as next year’s first quarter. Those dynamics are helping to drive down project financing costs, though there seems to be a general view that financial conditions remain restrictive overall.

Also surprising given the overall tenor of the quarterly survey was an improvement in the Year-Ahead Outlook Index. The index expanded 2% during the quarter to a reading of 96, though it is still down 3% from a year earlier.

The somewhat puzzling array of responses may signal a fundamental change in the state of U.S. construction. For much of the past few years, most contractors have been rather busy, boasting plentiful backlog while complaining about a lack of workers and readily available equipment and materials. With more infrastructure projects set to break ground and several largely privately-financed mega-projects underway or in various stages of development (e.g., chip/battery manufacturing), some contractors stand to be very busy going forward.

At the same time, there is a likely a growing number of contractors who face contracting demand for their services as private-developer driven activities become increasingly constrained by more expensive and difficult to obtain project financing. The upshot is that contractor performance is likely to become more varied during the quarters ahead, with some continuing to wrestle with elevated demand for services even as others experience declining backlog and pricing power.

Indeed, some respondents indicate that some of their projects have been postponed. Others indicate that certain geographic areas are becoming tougher economically, especially slow growth areas associated with significant outmigration. Another respondent indicated that “we are hiring anyone with a pulse.” In short, 2024 is shaping up to be a very interesting, albeit rather challenging, year for a substantial fraction of contractors.

About CFMA’s CONFINDEX

The CONFINDEX is CFMA’s proprietary confidence index survey that measures the confidence level of leading financial professionals in the U.S. commercial construction sector. CONFINDEX is compiled from four sub-indices measuring critical components of the financial health of a commercial construction company: Business Conditions, Financial Conditions, Current Conditions, and Year-Ahead Outlook. A reading of less than 100 indicates pessimism among the survey participants, while a reading of more than 100 indicates optimism among survey participants.

 

About the Author

Anirban Basu

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, MD. He is one of the Mid-Atlantic region’s most recognizable economists in part because of his consulting work on behalf of such clients as prominent developers, bankers, brokerage houses, energy suppliers, and law firms.

Read full bio